Mistletoe and monetary tightening

Weekly update
  • Weekly market update
  • 5 minute read

A good week for

  • Gold rallied in US dollar terms on weaker sentiment
  • Bonds advanced in local terms across the US and Europe

A bad week for

  • Equities weakened across the board in sterling terms
  • Gilts swooned on news from the Bank of England

Bank of England

The Bank of England’s Monetary Policy Committee (MPC) voted to raise interest rates by 15 basis points last week. The move was signposted in November when policymakers opted not to hike before seeing a strong October unemployment print as confirmation that the labour market was robust enough to withstand end of the furlough scheme. While October jobs data delivered, the emergence of Omicron caused economists to doubt that the Committee would vote for a rate rise. Inflation surged to 5.1% in November, and is expected to climb higher, supported by the Ofgem price increase in the spring, along with a rise in the VAT rate on hospitality. The market is expecting three more hikes over 2022, with balance sheet assets shrinking from May. However, it is possible that more slack emerges in the labour market, which could undermine long-lasting inflation dynamics.

US federal reserve

The US Federal Reserve’s Open Market’s Committee (FOMC) opted to double the speed of its asset purchase taper last week and to shrink purchases by $30bn per month. This may set up the Fed to begin raising interest rates in the spring. The Fed dot plot, which reflects committee members’ forecasts, points to three hikes in 2022. The Fed also raised inflation forecasts to 2.6% for PCE in 2022 and 2.3% in 2023. In a statement, Chair Powell remarked on the labour market’s “rapid progress”, but did acknowledge the down-side risks to the economy from Omicron.

European Central Bank

Last week the ECB confirmed plans to end its Pandemic Emergency Purchase Programme (PEPP) in March 2022. To ease the transition, the ECB will increase the pace of purchases under the Asset Purchase Programme into the autumn, to EUR40bn in Q2, and EUR30bn in Q3. The PEPP re-investment period will also be extended by a year to at least the end of 2024. The ECB also reiterated a desire to maintain the “flexibility and optionality” to react to any signs of market fragmentation. The ECB continued to indicate that rates will not rise until the Bank sees inflation “reaching 2% well ahead of the end of its projection horizon”. Current Bank projections see inflation below 2% in 2023 and 2024.

Sino-American relations

The US imposed further restrictions on Chinese firms on Thursday. The U.S. government put investment and export restrictions on several Chinese companies it accuses of complicity in the oppression of China's Uyghur minority or helping the military. These companies include DJI, a drone manufacturer, suspected of helping China’s government in surveillance. The US Commerce Department also added China’s Academy of Military Medical Sciences to a trade blacklist, restricting the purchase of US exports. A number of other technology firms were also sanctioned due to their suspected involvement in China’s military. Relations between the US and China are already strained over issues including the independence of Taiwan.

Festive wishes

This is the last newsletter of 2021. We wish you all a Merry Christmas, a Happy New Year and a safe festive season. We will be back in 2022.

 

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